Investing

Recession News (Sort of)

recession newsAre we in a recession? It depends on who you ask. Recession news can be complicated, especially in 2022.

The most common definition of a recession is two consecutive quarters of negative growth. The economy met that bar after the most recent report on gross domestic product (GDP), which showed the economy shrank in the first half of 2022.

Still, we won’t know whether we’re actually in a recession for several more months. Why? The official arbiter of recessions is the National Bureau of Economic Research (NBER), and its recession criteria depends on more data than GDP. To formally declare a recession, the NBER looks for a significant and widespread decline in economic activity that goes on for a while.

2022 Recession News

We may very well be in a recession. However, a mixed bag of positive and negative economic factors makes it weird and hazy.

On the positive side: The labor market remains strong, still creating plenty of new jobs. Consumer and business investment also is looking sturdy.

On the negative side: Inflation is obviously on everyone’s radar, as is the Fed’s latest interest rate hike.

Whether we’re officially in a recession or not, the economy is flashing some undeniable warning signs. Despite recent gains, we can expect more market volatility. That’s the cyclical nature of the economy and investment markets. Ups and downs are normal.

The best thing we can do is have faith in our proven investment strategy, stick to our written financial plans, and ride out the current storm.

Photo by Andrea Piacquadio via Pexels.com
By |2022-08-23T12:55:47-07:00August 31st, 2022|Current Affairs, Investing|

Investing Fundamentals Have Not Changed

investing fundamentals have not changedWar between Russia and Ukraine, climbing gas prices, and inflation at a 40-year high: It’s understandable that investors might be edgy these days. Yet, it’s important to recognize long-term investing fundamentals have not changed.

Some may be surprised to learn that historically stocks have been remarkably resilient, even in times of war. Mark Armbruster of the CFA Institute points out the average return for large-cap U.S. stocks during World War II and the Korean, Vietnam, and Gulf wars was 11.4 percent. Current stock market performance has been on par with historical norms.

The Swiss Finance Institute looked at the period from 1926 to 2013 and found stock markets tend to fall in the “pre-war phase,” as forces are massed and tensions rise. Then stocks tend to rise when war breaks out. They call this phenomenon “the war puzzle” because there is no clear explanation for it.

Recently, the U.S. S&P 500 fell significantly in the weeks running up to Russia’s invasion of Ukraine. A month later, stocks had recovered a good portion of the drop.

Once again, we see the basics of good investment management remain valid over time. Investing fundamentals have not changed despite the headlines.

  • Work with a trusted advisor and develop a written long-term investment plan aligned with your tolerance for risk.
  • Stick with that plan, unless your circumstances profoundly change.
  • Stay diversified and stay invested, even when things feel daunting.

 

By |2022-04-04T18:39:21-07:00April 11th, 2022|Current Affairs, Investing|

Avoid the Behavior Gap

avoid the behavior gap

I’ve been a big fan of Carl Richards, the New York Times Sketch Guy and financial planner, since I stumbled upon his work in 2009. His illustrations and insights are both simple and impactful when it comes to investment and planning concepts. A great example is the Behavior Gap.

Financial research firm DALBAR produces the Quantitative Analysis of Investor Behavior (QAIB) report annual; it has been the nation’s leading study on investor behavior for 27 years and has shown a consistent and regular outcome regarding stock market returns and average equity fund investor returns. Though the numbers may vary from one year to the next, the clear and critical message holds true – investment returns are consistently greater than investor returns. This difference is what Carl Richards has termed the Behavior Gap and shows clearly in the sketch below.

Behavior GapWhy does the gap exist?

The typical stock market investor, unfortunately, buys high when things are going well and sells low when the markets drop. This behavior causes the gap in long-term returns.

Another one of Richards’ sketches (below) illustrates the unfavorable pattern that causes the Behavior Gap. It depicts what happens when we allow emotions, such as greed and fear, to take over the decision-making process for our portfolio. This pattern leads to the type of underperformance that many average investors experience.

As the sketch suggests, making rational decisions about our investments is not automatic for most people, especially in volatile markets. It takes a certain mindset or temperament, along with a well thought out investment plan to avoid this situation.

Behavior Gap cycle

Sketches and Behavior Gap © Carl Richards
By |2022-03-11T09:50:53-07:00March 28th, 2022|Investing|

Your Investment Policy Statement

Have you ever wondered why we at Perspective Financial Services have annual reviews and discussions about your Investment Policy Statement (IPS)? A well-written, up-to-date IPS is a powerful communication and planning tool, with three key benefits:

  1. It allows you and your advisor to discuss and document your goals, as well as your tolerance for investment risk, to create an effective investment strategy and asset allocation.
  2. It helps clarify how and why your portfolio’s investment mix determines its performance over the long-term. (The chart below offers a good visual regarding why asset allocation is so important.)
  3. It enables you and your advisor to periodically re-visit your goals and strategy, to ensure they remain appropriate to changes in your life and needs.

An Investment Policy Statement (IPS) is a document prepared by an investment manager and their client. It states the goals and the strategy for how to reach those goals through a specific investment mix agreed upon by the client and the investment manager. It’s prevalent within the institutional investment management space and is becoming more so at the individual or retail level. Perspective Financial Services has utilized the IPS for its clients since Mike McCann founded the firm in 2003.

Your Investment Policy StatementCall or email your advisor if you have any thoughts or questions about your IPS. We’re happy to go over it with you any time.

 

By |2021-12-02T14:05:37-07:00January 3rd, 2022|Financial Planning, Investing|

Aligning Investments and Values

aligning investments and valuesEven before the 1971 founding of Pax World fund – the first socially responsible mutual fund in the United States – many people have wanted to make a difference with their dollars. The question remains, is there a practical way of aligning investments and values?

In the early days of socially-responsible investing (SRI), most of the strategies revolved around excluding “sin stocks,” primarily those associated with alcohol, tobacco, and gambling. The list of exclusionary stocks grew in the 1980s, adding oil and gas companies in the wake of disasters like India’s Union Carbide gas leak and the Exxon Valdez oil spill.

SRI has since evolved into an inclusive investment strategy with active management and deep research into companies that claim to be good corporate citizens. The emphasis is now on investing in companies with high marks for environmental issues, societal responsibility, and corporate governance (ESG).

The idea of influencing positive change in society through our investments is a noble pursuit. The premise of developing an ESG framework to analyze how a company measures up against its peers can provide a more holistic understanding of a company to complement its financial data.

There are obstacles, however, to obtaining good ESG data. Many companies are reluctant to add more data to their already long list of legally-required reporting and disclosures. Another problem is “greenwashing” – using public relations and advertising tactics to convey a more environmentally-friendly and socially-conscious image than is accurate. Plus, a standardized ESG rating system doesn’t exist; environmental issues, societal responsibility, and corporate governance have different weightings and levels of importance in each industry and to each investment analyst.

Historically, well-run companies with a holistic operational approach have always been a good long-term investment. As more companies begin to disclose accurate ESG metrics that can be more-rigorously applied to the investment process, companies with good ESG scores will ultimately attract investment dollars and prosper.

By |2021-11-09T08:51:56-07:00December 6th, 2021|Current Affairs, Investing|